Demand and Supply

Question 1

What is demand?

Answer 1

The amount of a product that consumers are willing and able to purchase at any given price. It’s concerned with what consumers are able to buy rather than what they want to buy.

Question 2

What are the factors that lead to changes in demand?

Answer 2

1) Prices of substitutes.
2) Prices of complements.
3) Changes in consumer incomes.
4) Fashions, tastes and preferences.
5) Advertising and branding.
6) Demographics.
7) External shocks.
8) Seasonality.

Question 3

Prices of substitutes

Answer 3

For example a consumer buying a can of Coca Cola may buy a can of Pepsi instead. The price of substitutes will affect demand. If the price falls, the quantity demanded will rise. The demand for the main product would fall.

Question 4

Prices of complements

Answer 4

Consumers sometimes purchase certain goods together since the two goods are often used together. For example consumers of cereals will buy milk with it and car buyers will buy the car insurance with it.

Question 5

Changes in consumer incomes

Answer 5

The amount of money that people earn will influence the amount and types of goods that they buy. Generally when income rises, demand for the new product also rises. For example if wages and salaries go up, then people may decide to go out to more restaurants, buy a new car or go on holiday. These are all examples of normal goods. But a minority of goods in the economy are inferior goods, which is when demand will fall when incomes rise. Examples of this are supermarkets’ ‘own-label’ brands or public transport.

Question 6

Fashions, tastes and preferences

Answer 6

Demand patterns can change because of the fashions and trends of consumers. For example the growth of 4-wheel derived cars in the UK has changed. This isn’t because of an increasing number of people needing to drive off-road but because more drivers have simply found them appalling to use. The clothes industry has dynamically changed too because of how a certain product is bought more in a certain season compared to another season.

Question 7

Advertising and branding

Answer 7

Businesses try to influence demand for their products through advertising and other forms of promotion. If goods are heavily advertised then demand for them will rapidly increase. Branding helps businesses use their own name, term or symbol to differentiate their products from competitors so they can increase sales.

Question 8

Demographics

Answer 8

This when consumers are grouped into things such as age, gender and location. For example this helps businesses target over 60’s for specialist holidays and retirement homes, helps target both genders for certain types of clothes and rural and urban areas/countries.

Question 9

External shocks

Answer 9

When factors that have even more control of the business have an impact on products. This could happen if a strong new competitor enters the market, if the government raises taxes for a good like alcohol, rising demand for a good in the economy and social and environmental changes in society.

Question 10

Seasonality

Answer 10

Some goods and services have seasonal demand where demand for goods rises at certain times in the year. For example demand for warm clothing goes up in Winter and demand for garden furniture goes up in late Spring-early Summer.

Question 11

What is supply?

Answer 11

Supply is the amount of a product which suppliers will offer to the market at a given price. The higher the price of a good, the more the product will sell.

Question 12

What are the factors that lead to a change in supply?

Answer 12

1) Changes in the costs of production.
2) Introduction of new technology.
3) Indirect taxes.
4) Government subsidies.
5) External shocks.

Question 13

Changes in the cost of production

Answer 13

This influences the supply of any product which includes wages, raw materials, energy, rent and machinery. If production costs rise, sellers are likely to reduce supply because of reduced profits. The availability of resources can also affect supply. If there is a shortage in some of the factors of production such as land, labour, raw materials and capital then it will be difficult for producers to supply the market.

Question 14

Introduction of new technology

Answer 14

When this becomes available, many businesses will start to use it in their production process. Newer technology is usually more efficient than older technology and helps lower production costs, encouraging firms to offer more on sale. For example Britain’s manufacturers are using cutting-edge technology to improve products in the car manufacturing and aerospace industries.

Question 15

Indirect taxes

Answer 15

These are taxes imposed by the government on spending. Value-Added Tax (VAT) and excise duties such as those levied on petrol and tobacco. If an indirect tax is imposed and demand is relatively inelastic, the consumer will bear a greater burden of the tax. In January 2011, the UK government raised the rate of VAT from 17.5% to 20%. Many argued that this measure would prolong the recession as it acts as a disincentive to producers.

Question 16

Government subsidies

Answer 16

This is when the government gives money to businesses in the form of a grant. Subsidies may be given to firms to try and encourage them to produce a particular product. Subsidies affect supply since they reduce it’s production costs.

Question 17

External shocks

Answer 17

This can happen when global events ,such as politics in the Middle East, affect supply of some products like oil. It can soo happen when the supply of agricultural products is affected by the constantly changing weather. Good weather helps crops grow whilst bad weather can reduce the number of plants growing. Government economic policies like inflation can increase business costs for firms with debt. Finally the price of related goods can determine when a business might make or sell a product.